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The impact of trade reforms on the extensive margin of trade

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Maria Bas
Ivan Ledezma

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Abstract

This paper develops an inter-industry model of trade with heterogeneous industries to analyze the impact of trade liberalization on the extensive margin of trade. The model extends the work of Melitz (2003), incorporating endogenous labor productivity gains determined by an initial investment in technology, embodied in imported capital goods. Industries are differentiated by the impact of this technology on labor efficiency. Trade liberalization reduces the price of imported capital equipment and increases factor demands. Depending on the reaction of labor productivity to the new technology, both effects have a different impact on industries. This mechanism introduces two results. First, the process of trade liberalization is biased towards industries where imported technologies have a higher impact on labor productivity. Second, a reduction of tariffs would have little impact on the extensive margin of trade in countries already highly open.

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Paper provided by PSE (Ecole normale supérieure) in its series PSE Working Papers with number 2006-36.

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Date of creation: 2006
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Handle: RePEc:pse:psecon:2006-36

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  2. Andrew B. Bernard & J. Bradford Jensen & Peter K. Schott, 2003. "Falling Trade Costs, Heterogeneous Firms and Industry Dynamics," CEP Discussion Papers dp0585, Centre for Economic Performance, LSE. [Downloadable!]
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  3. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and Productivity in International Trade," Boston University - Institute for Economic Development 105, Boston University, Institute for Economic Development. [Downloadable!]
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  4. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2005. "Productivity spillovers, terms of trade, and the "home market effect"," Staff Reports 201, Federal Reserve Bank of New York. [Downloadable!]
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  6. Grossman, Gene M & Helpman, Elhanan, 1990. "Trade, Innovation, and Growth," American Economic Review, American Economic Association, vol. 80(2), pages 86-91, May. [Downloadable!] (restricted)
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  7. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects Of Regulation And Deregulation In Goods And Labor Markets," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 879-907, August. [Downloadable!] (restricted)
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  8. Andrew B Bernard & J Bradford Jensen, 2001. "Who Dies? International Trade, Market Structure, and Industrial Restructuring," Working Papers 01-04, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
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  9. Baldwin, Richard & Forslid, Rikard, 2004. "Trade Liberalization with Heterogenous Firms," CEPR Discussion Papers 4635, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA. [Downloadable!]
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  11. Paul R. Bergin & Reuven Glick, 2003. "Endogenous Nontradability and Macroeconomic Implications," NBER Working Papers 9739, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Paul R. Bergin & Reuven Glick, 2005. "Tradability, productivity, and understanding international economic integration," Working Paper Series 2005-13, Federal Reserve Bank of San Francisco. [Downloadable!]
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  13. Jonathan Eaton & Samuel Kortum, 2002. "Technology, Geography, and Trade," Econometrica, Econometric Society, vol. 70(5), pages 1741-1779, September. [Downloadable!] (restricted)
  14. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Bergin, Paul R. & Glick, Reuven & Taylor, Alan M., 2006. "Productivity, tradability, and the long-run price puzzle," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2041-2066, November. [Downloadable!] (restricted)
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  16. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September. [Downloadable!] (restricted)
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